October 31, 2014

Some FAQs about Scenario Planning

FSG regularly receives inquiries about scenario planning, strategic analysis and, with increasing frequency, how to make insights about the future truly executable now – and not just an option for some time in the future.  We have a lot to say about all of these topics. Unfortunately, they are just not located in a single place on our website.  So, here’s a handy guide, with links, to some of the more popular sources of insight gleaned from FSG’s more than two decades of scenario-consulting experience.

Isn’t strategy dead?  Isn’t the future just a crapshoot?  Well, that’s a trendy opinion in academic circles – the idea that the pace of change and degree of complexity and uncertainty in the world renders any serious attempt to anticipate the future a waste of time, energy and consulting dollars. (Cynics will say, in addition, that CEOs really aren’t invested in the future that lies beyond their tenure anyway.) Needless to say, we disagree. We think strategy a la scenario planning is more relevant than ever because of all the complexity and uncertainty that face corporate and government leaders.  Patrick Marren has written recently about this in a blog post about lessons learned by FSG doing scenario planning.  Peter Kennedy, in another recent post, points out the shortcomings of purely numerical modeling in the face of unfathomable “unknown unknowns.”

What are the major types of scenario planning, and how do they compare? Many executives approach us with some initial grounding in scenario planning and want to know, quite reasonably, how our particular brand of futures thinking and scenario planning compares with what they’ve experienced.  Often, the “scenario” processes are quite different and have different objectives.  FSG partner Charles Thomas sorts this all out.  He has created a detailed and comprehensive guide to the various types of scenario planning, including strategic management scenarios, which FSG favors for doing longer-term planning in the face of widespread change and strategic uncertainty. 

We’re a numbers culture.  Our folks are lost without them.  Can scenario analysis help?  The answer is yes, with some important caveats, the most important of which is the understanding that scenarios are not about prediction. That is, scenarios are not alternative forecasts. (While alternative forecasts are often called “alternative scenarios,” that usage is imprecise and confusing.) Conventional forecasts are useful when historical data are a reliable basis for understanding the future.  Scenarios, which are in part informed by numerical indicators but not defined by them, are useful when future uncertainty is too great for historical data to be reliable.  Scenarios often include quantitative indicators (GDP growth, inflation, exchange rates, unemployment, etc.) to help users better understand market and operating conditions. Numerical indicators also act as an internal consistency check as the scenarios are getting developed. But these should not overwhelm the scenario narrative. They should not preempt discussions in the actual scenario workshop about what the scenario means for strategy and operations. Therefore, to maximize strategic freedom, whatever numerical indicators are chosen should not be too close to the users’ product or service. Finally, despite these warnings, FSG believes that scenarios provide useful frameworks for developing scenario-contingent indicators for downstream modeling activities. It’s just important that this task be kept distinct from the core scenario-workshop discussions, and undertaken later, possibly as part of risk management and business case development.  FSG has published a case study on blending quantitative and qualitative approaches in a scenario engagement.  It includes some important lessons learned on balancing qualitative and quantitative analyses.

How do you ensure action and results from a scenario project?  Every context is different.  But implementation success tends to revolve around a few critical principles.  First, the scenario approach must be embraced by the highest-ranking person responsible for the results. (This could be a divisional VP, a CFO or CEO, depending where the de facto strategy role resides.)  This is key, because scenario planning is unorthodox and even counter-cultural in these days of big data and powerful analytics.  Executives who rise to the top tend to be data-lovers. Many are impatient with processes that don’t spit out unambiguous answers. In any case, participants in this kind of planning exercise need to know that the boss buys into it and expects to see thoughtful, original results – and action.  Second, the process should not be limited to “outside the box” creative types.  It requires buy-in on the part of people who might normally be considered skeptics – finance people, operators, lawyers, risk managers, etc. In some of FSG’s most successful scenario engagements, these communities have turned out to be the strongest and most forceful proponents, once immersed in the process. Third, implementation needs to be, as we say, “baked into” the process from the start.  It cannot be an afterthought.  The insights gained from the scenario process must flow naturally into standard business planning and project management systems. The Coast Guard has more than 15 years’ experience with scenario planning.  Their experience migrating from strategic insight to strategic action is well documented in the book FSG authored for them.

What is the best way to ensure that strategic thinking stays embedded in the organization after a scenario-planning project is completed? This is an excellent question.  One-off scenario-planning projects rarely deliver sustainable results. The key factor is the project “core team.”  The scenario core team (usually 8-12 in number) is project staff from the sponsoring organization, ideally working in close partnership with outside scenario consultants or facilitators.  Over the course of a scenario-planning engagement, core team members absorb scenario thinking fundamentals and develop in-depth familiarity with the output, to the extent that they have the skill and confidence to assume responsibility for follow-on tasks (e.g., developing contingent strategies for high-risk, low probability situations uncovered in scenario deliberations) and to train new core team members. Core teams should be regularly refreshed with new and diverse recruits rotated in. See Coast Guard Project Evergreen, "Blue Book"Core Team, p. 6. Scenario-planning activities should be regularly held, both to ensure sustained attention to implementation initiatives and to keep the imperative of "thinking and acting with strategic intent" real and vital.